HS 321 Module 12

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SAngell3
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HS 321 Module 12
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2012-09-13 23:08:19
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HS 321 Module 12
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HS 321 Module 12
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  1. A corporation is a business organization that possesses certain legal characteristics, such as limited liability, centralized management, transferability of interest, and continuity of life.

    a) True
    b) False  
    a) True 
  2. Limited liability means that it is only the officers of a corporation who are liable for the debts of the corporation.

    a) True
    b) False  
    b) False 

    Limited liability means that a creditor of a corporation cannot proceed against the individual shareholders personally to satisfy a corporate debt.
  3. A corporation is not legally dissolved on the death, disability, incapacity, or withdrawal of any of its owners.

    a) True
    b) False  
    a) True 
  4. A corporation is a separate taxable entity, distinct and apart from its owners.

    a) True
    b) False  
    a) True 
  5. One nontax advantage of corporate status is the ability to freely transfer ownership of the corporation.

    a) True
    b) False  
    a) True 
  6. The tax advantages of corporate status include the ability to deduct the cost of certain nontaxable fringe benefits for employees.

    a) True
    b) False  
    a) True 
  7. A corporation that elects to be taxed as an S corporation will have all income and losses passed through to its shareholders in a way similar to the partnership form of business.

    a) True
    b) False  
    a) True 
  8. An S corporation may not have more than 50 shareholders.

    a) True
    b) False  
    b) False 

    An S corporation may have up to 100 shareholders. 
  9. An S corporation election is a means of allowing start-up losses of a company to be deducted on the individual returns of its shareholders.

    a) True
    b) False  
    a) True 
  10. In all cases the incorporation of a partnership will result in current tax obligations to the partners on the transfer of their properties to the newly formed corporation.

    a) True
    b) False  
    b) False 

    On the contrary, there are many instances under the Internal Revenue Code where property of an existing business may be transferred to a newly formed corporation solely in exchange for the corporation's stock without recognition of gain. 
  11. One of the requirements for nonrecognition of gain on the formation of a new corporation is that the transfer of property must be solely in exchange for the corporation's own stock.

    a) True
    b) False  
    a) True 
  12. When a transferor to a new corporation receives stock plus cash, he or she will recognize gain to the extent of the lesser of the cash received or gain realized.

    a) True
    b) False  
    a) True 
  13. The organizational expenses on the formation of a corporation are currently deductible in full.

    a) True
    b) False  
    b) False 

    A maximum of $5,000 of these expenses is deductible in the corporation's first year. The balance must be amortized over a 180-month period beginning with the month in which the corporation begins business. 
  14. When a shareholder in a new corporation lends money to it, the corporation will receive a deduction for the interest paid on the indebtedness to the shareholder, provided that it is a valid obligation and the corporation is not too thinly capitalized.

    a) True
    b) False  
    a) True 
  15. The highest corporate tax rate is 46 percent.

    a) True
    b) False
    b) False

    Corporate taxable income over $100,000 up to and $335,000 is taxed at 39 percent. This is currently the highest corporate rate. 
  16. The reasonableness test for the salary of a shareholder-employee is based on the highest 3 years' average salary of the shareholder-employee.

    a) True
    b) False  
    b) False 

    The reasonableness test involves the determination of a salary that would ordinarily be paid for similar services by similar corporations under like circumstances. 
  17. The IRS permits a corporation to deduct without limit any salary paid to its officer-shareholders as long as the salary is specified in a written agreement.

    a) True
    b) False  
    b) False 

    The IRS permits a corporation to deduct without limit any salary paid to its officer-shareholders as long as the salary is specified in a written agreement. 
  18. After 2009, the maximum deductible percentage of qualified production activities income is 9 percent.

    a) True
    b) False  
    a) True 
  19. A corporation is allowed a charitable deduction for amounts contributed up to 50 percent of adjusted gross income.

    a) True
    b) False  
    b) False 

    A corporation may deduct amounts up to 10 percent of its taxable income for contributions to qualified charities. 
  20. A corporation is entitled to exclude from gross income up to 60 percent of its net long-term capital-gain.

    a) True
    b) False  
    b) False 

    Corporations are not entitled to a net long-term capital-gain exclusion. 
  21. For income tax purposes, corporation may deduct a maximum of 50 percent of any dividends received from other domestic corporations.

    a) True
    b) False
    b) False 

    A corporation may deduct 70 percent of any dividends received from domestic corporations. The deduction may be 80 percent, or even 100 percent, of dividends received in some cases.
  22. Excess cash accumulated by a corporation to purchase key person life insurance is considered an unreasonable accumulation by the IRS and is subject to the accumulated-earnings tax.

    a) True
    b) False
    b) False

    The accumulation of cash to purchase key person life insurance is considered a reasonable business need. Upon the death of a key employee, a corporation may require additional capital to replace the value of the employee's services. Therefore accumulations for this purpose would not be subject to the accumulated-earnings tax.
  23. The personal-holding-company tax is imposed at a rate of 50 percent on "undistributed personal-holding-company income."

    a) True
    b) False
    b) False

    The personal-holding-company tax is currently imposed at a rate of 15 percent.
  24. A distribution of appreciated property by a corporation is treated for tax purposes as if the property had been sold at the time of the distribution.

    a) True
    b) False
    a) True
  25. A C corporation in the manufacturing business having $50,000 of taxable income for the year will pay federal income taxes in the amount of

    A) $7,500
    B) $17,000
    C) $19,500
    D) $12,500
    A) $7,500

    The 15 percent tax bracket applies to the first $50,000 of corporate taxable income. Therefore the tax is $7,500 ($50,000 x .15).
    (this multiple choice question has been scrambled)
  26. Ben and John formed a corporation. John transferred $60,000 in cash to the corporation. Ben transferred property with a basis of $30,000 and a fair market value of $80,000. The corporation paid him $20,000 in cash. They each received back 50 percent of the stock of the corporation. How much gain will Ben recognize?

    A) $20,000
    B) $30,000
    C) $60,000
    D) $80,000
    A) $20,000

    When property is transferred in a tax-free incorporation, there is no recognition of gain or loss to the transferor if only stock is received in exchange. However, gain will be recognized to Ben to the extent of money or other property received ($20,000).
    (this multiple choice question has been scrambled)
  27. Which of the following statements concerning the income taxation of corporations is (are) correct?

    I. Any corporation can fully deduct the dividends it receives each year from other corporations.

    II. A corporation can only use capital losses to offset capital gains.

    A) Neither I nor II
    B) Both I and II
    C) I only
    D) II only
    D) II only

    I is incorrect because the dividends-received deduction, if available, is generally less than 100 percent.
    (this multiple choice question has been scrambled)
  28. A newly formed corporation will have gross income in the current taxable year of $100,000. Which of the following would be fully deductible by the corporation for the current taxable year? 

    I. All of the organizational expenses incurred in forming the corporation 

    II. the payment of common stock dividends out of current earnings and profits

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    D) Neither I nor II

    I is incorrect because organizational expenses in excess of the deductible limit permitted under section 195 of the Internal Revenue Code must be amortized over a 180-month period. II is incorrect because dividends paid are not deductible regardless of the amount of the corporation's earnings and profits.
    (this multiple choice question has been scrambled)
  29. Which of the following statements concerning the personal-holding-company tax is (are) correct?

    I. One requirement to be treated as a personal holding company is that more than 50 percent of the value of the company's stock must be held by five or fewer individuals.

    II. The personal-holding-company tax can be avoided by the payment of dividends by the company.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    A) Both I and II
    (this multiple choice question has been scrambled)
  30. All the following statements concerning the accumulated-earnings tax are correct EXCEPT

    A) Its purpose is to prevent corporations from being used as devices to avoid personal income tax through the accumulation of corporate earnings.
    B) Accumulations of $350,000 or less will automatically be considered as held for the reasonable needs of the business.
    C) It applies to accumulated earnings and profits retained by a corporation that are in excess of a specified amount and for which there is no reasonable business purpose.
    D) Retention of earnings to purchase key person insurance is generally considered a reasonable need of the business.
    B) Accumulations of $350,000 or less will automatically be considered as held for the reasonable needs of the business.

    The accumulated-earnings tax credit (or exemption) is $250,000 ($150,000 for professional service corporations).
    (this multiple choice question has been scrambled)
  31. Which of the following statements concerning S corporations is (are) correct? 

    I. An S corporation may have only two classes of stock-preferred and common. 

    II. The electing corporation must be a domestic corporation with no more than 50 shareholders.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    D) Neither I nor II

    I is incorrect because an S corporation may not have preferred stock. II is incorrect because an S corporation may have up to 100 shareholders.
    (this multiple choice question has been scrambled)
  32. All of the following are characteristics of a corporation EXCEPT:

    A) Limited liability.
    B) Continuity of life.
    C) Transferability of interest.
    D) Decentralized management.
    D) Decentralized management.

    Centralized management is a characteristic of a corporation.
    (this multiple choice question has been scrambled)
  33. All of the following are correct statements regarding corporations EXCEPT:

    A) A corporation is treated as a separate taxable entity, and files its own income tax return.
    B) Limited liability means that only the top five officers of the corporation can be held personally liable for corporate debts.
    C) A corporation will remain in existence even after the death or disability of one of the shareholders.
    D) Corporations are permitted to deduct the cost of certain fringe benefits which are nontaxable to employees.
    B) Limited liability means that only the top five officers of the corporation can be held personally liable for corporate debts.

    Limited liability means that creditors cannot bring an action against shareholders to recover corporate debt.
    (this multiple choice question has been scrambled)
  34. All of the following are correct statements regarding corporations EXCEPT:

    A) Limited liability means that only the top five officers of the corporation can be held personally liable for corporate debts.
    B) Corporations are permitted to deduct the cost of certain fringe benefits which are nontaxable to employees.
    C) A corporation is treated as a separate taxable entity, and files its own income tax return.
    D) A corporation will remain in existence even after the death or disability of one of the shareholders.
    D) A corporation will remain in existence even after the death or disability of one of the shareholders.

    I is incorrect. Death or bankruptcy of a shareholder will not cause the dissolution of a corporation. II is incorrect. A corporation is a separate tax-paying entity.
    (this multiple choice question has been scrambled)
  35. Which of the following individuals or entities is eligible to own shares of S corporation stock?

    A) Partnership.
    B) Grantor trust.
    C) Nonresident alien.
    D) Publicly-traded C corporation.
    B) Grantor trust.

    Grantor trusts are allowed to own stock in an S corporation.
    (this multiple choice question has been scrambled)
  36. Which of the following statements is/are correct regarding S corporations?

    I. Only domestic corporations with no more than 75 shareholders are eligible to make the S corporation election.

    II. An S corporation can have both preferred and common stock. 

    A) Only II.
    B) Only I.
    C) Both I and II.
    D) Neither I nor II.
    D) Neither I nor II.

    I is incorrect. An S corporation can have up to 100 shareholders.

    II is incorrect. An S corporation can only have one class of stock outstanding.
    (this multiple choice question has been scrambled)
  37. Which of the following statements is/are correct regarding S corporations?

    I. Only domestic corporations with no more than 75 shareholders are eligible to make the S corporation election.

    II. An S corporation can have both preferred and common stock. 

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    A) Only I.

    Once made, the election is effective indefinitely.
    (this multiple choice question has been scrambled)
  38. Which of the following statements is correct regarding S corporations?

    A) S corporations may have non-resident aliens as shareholders.
    B) S corporations are separate tax paying entities.
    C) S corporation status is automatic if there are fewer than 100 shareholders.
    D) S corporations are prohibited from having more than one class of stock.
    D) S corporations are prohibited from having more than one class of stock.

    An S corporation election must be made by the shareholders. C is incorrect. The S corporation is a flow through entity.

    Non-resident aliens are not permitted shareholders.
    (this multiple choice question has been scrambled)
  39. All of the following are requirements that must be met for the formation of a corporation to be tax-free EXCEPT:

    A) The shareholders cannot participate on the board of directors for at least three years.
    B) Only stock can be received from the corporation.
    C) The shareholders must be in control of the corporation.
    D) There must be a transfer of property or cash to the corporation.
    A) The shareholders cannot participate on the board of directors for at least three years.

    There is no such requirement.
    (this multiple choice question has been scrambled)
  40. Norma transferred a building worth $1,000,000 (basis $300,000) to a corporation in exchange for 100% of the corporation's stock.

    Which of the following statements is correct regarding this arrangement?

    A) The corporation would not be entitled to depreciate the building.
    B) If the corporation sold the building, Norma would recognize a capital gain of $700,000 on her personal income tax return.
    C) Norma's basis in the stock will be $300,000.
    D) Norma will recognize a gain of $700,000 at the time of the transfer.
    C) Norma's basis in the stock will be $300,000.

    Since this formation would qualify as a tax-free incorporation, Norma's basis in her stock would be equal to the basis in the property transferred.
    A is incorrect. No gain or loss will be recognized for tax purposes on the transfer, since Norma owns 100% of the stock.
    B is incorrect. If the corporation sold the building, the corporation would recognize a gain of $700,000. D is incorrect. The corporation would be entitled to an income tax deduction for depreciation of the building.
    (this multiple choice question has been scrambled)
  41. All of the following statements are correct regarding the tax treatment of corporations EXCEPT:
    A) The first $50,000 of a corporation's taxable income is taxed at a 15% rate.
    B) Corporations are entitled to a deduction for reasonable compensation paid to officers and employees.
    C) Organizational expenditures of a corporation must be capitalized and amortized over a 60 month period.
    D) A corporation can deduct up to $3,000 of its capital losses against ordinary income.
    D) A corporation can deduct up to $3,000 of its capital losses against ordinary income.

    The $3,000 allowance only applies to individual taxpayers. Corporations can only deduct capital losses against capital gains.
    (this multiple choice question has been scrambled)
  42. Which of the following statements is/are correct regarding the taxation of corporations?

    I. If property is transferred to a corporation in exchange for stock and cash, the transferor must recognize gain based on the lesser of the gain realized or the cash received.

    II. If a shareholder lends money to a new corporation, the corporation may receive an income tax deduction for interest expense paid to the shareholder, if certain conditions are met.

    A) Both I and II.
    B) Neither I nor II.
    C) Only II.
    D) Only I.
    A) Both I and II.
    (this multiple choice question has been scrambled)
  43. Which of the following statements is correct regarding corporate taxation?

    A) A corporation is only taxed on 50% of its net long-term capital gain.
    B) Most corporations receiving dividends will be entitled to a 70% dividends received deduction.
    C) The maximum deduction allowed for compensation paid to a CEO is $5,000,000.
    D) A 25% domestic production activities deduction is permitted for U.S. manufacturing corporations.
    B) Most corporations receiving dividends will be entitled to a 70% dividends received deduction.

    Excess remuneration rules indicate that the maximum deduction allowed for compensation payments to a CEO is $1,000,000. There are several exceptions to this limitation.

    A corporation is taxed on its entire net long-term capital gain at ordinary income tax rates.

    Certain U.S. manufacturing corporations are permitted to claim a domestic production activities deduction under Section 199. However, the maximum deduction is 9% of domestic production gross receipts (less certain deductions).
    (this multiple choice question has been scrambled)
  44. Which of the following statements is/are correct regarding corporate net operating losses?

    I. A corporation having a net operating loss in the current year can elect to forgo the carryback.

    II. Corporate net operating losses can be carried back up to 10 years and carried forward up to five years.

    A) Both I and II.
    B) Only I.
    C) Neither I nor II.
    D) Only II.
    B) Only I.

    II is incorrect. Corporate net operating losses can be carried back up to 2 years and carried forward up to 20 years
    (this multiple choice question has been scrambled)
  45. Which of the following statements is correct regarding the taxation of corporations?

    a) The highest corporate tax rate is currently 45%.
    b) A corporation is permitted to exclude from gross income up to 35% of dividends received
    from other domestic corporations.
    c) The payment of common stock dividends out of current earnings and profits are fully
    deductible in the year paid.
    d) If a shareholder lends money to a corporation through a valid obligation, the corporation can deduct the interest expense paid to the shareholder.
    d) If a shareholder lends money to a corporation through a valid obligation, the corporation can deduct the interest expense paid to the shareholder.

    The highest corporate tax rate is currently 39%.

    • The dividends received deduction permits a corporation to exclude from gross income 70-
    • 100% of dividends received from other domestic corporations.

    Dividends paid by a corporation are non-deductible.
  46. Which of the following statements is/are correct regarding the corporate charitable contribution deduction?

    I. The charitable contribution deduction allowed for a corporation is limited to 50% of the corporation's taxable income.

    II. Any disallowed charitable contribution deduction can be carried forward for up to 5 years.

    A) Both I and II.
    B) Only II.
    C) Neither I nor II.
    D) Only I.
    B) Only II.

    I is incorrect. The charitable contribution deduction allowed for a corporation is limited to 10% of the corporation's taxable income.
    (this multiple choice question has been scrambled)
  47. Which one of the following types of investor benefits most from the tax advantage of preferred stocks?

    A) Individual taxpayer.
    B) Non-profit governmental organization.
    C) Mutual fund.
    D) Corporate taxpayer.
    D) Corporate taxpayer.

    Only corporations are eligible for a dividends received deduction.
    (this multiple choice question has been scrambled)
  48. All the following statements concerning the accumulated-earnings tax are correct EXCEPT:

    A) Its purpose is to prevent corporations from being used as devices to avoid personal income tax through the accumulation of corporate earnings.
    B) Accumulated earnings in the form of cash values of key person life insurance will generally
    C) The corporation must pay the greater of the accumulated earnings tax or the regular tax.
    not be subject to the accumulated earnings tax.
    d) The tax applies all accumulated earnings and profits retained by a corporation that are above
    $250,000 and for which there is no reasonable business purpose.
    C) The corporation must pay the greater of the accumulated earnings tax or the regular tax.

    If accumulated earnings tax is due, the corporation must pay BOTH the regular tax and the accumulated earnings tax.
    (this multiple choice question has been scrambled)
  49. Which of the following statements is/are correct regarding a personal holding company?

    I. A corporation that derives at least 60% of its gross income from passive investment income may be considered a personal holding company.

    II. A personal holding company will be subject to a penalty tax at a rate equal to the highest individual income tax rate. 

    A) Neither I nor II.
    B) Only II.
    C) Both I and II.
    D) Only I.
    C) Both I and II.
    (this multiple choice question has been scrambled)
  50. Which of the following statements is/are correct regarding property distributions from a corporation?

    I. A distribution of appreciated property by a corporation will be treated for tax purposes as if the property had been sold for its fair market value.

    II. If loss property is distributed by a corporation, the corporation will receive a capital loss deduction in the year of the distribution.

    A) Both I and II.
    B) Neither I nor II.
    C) Only I.
    D) Only II.
    C) Only I.

    II is incorrect. If loss property is distributed by a corporation, the corporation will not receive an income tax deduction.
    (this multiple choice question has been scrambled)

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